Corporate debt exploding

Debt levels continue to explode, but investors aren’t worried — yet

U. S. companies are sitting on a record $ 1.8 trillion in cash and investments. One problem. They also are on the hook for $ 6.6 trillion in debt.

Talk about being cash rich but debt poor. U. S. companies hold 28 cents in cash for every dollar they must repay in debt, the lowest cash- to- debt ratio since the financial crisis wound down in 2009. It’s even uglier if you exclude the 1% richest companies. The other 99% of the less fortunate companies have 15 cents in cash for every $ 1 in debt they owe. That is “the lowest we’ve seen in the past decade, including the years preceding the Great Recession,” according to the report co- authored by Andrew Chang and David Tesher of S& P Global.

Debt levels are exploding even as cash is growing at a slowing rate. Companies borrowed more than $ 850 billion last year, taking their total debt to $ 6.6 trillion, according to a new report by S& P Global Ratings that looked at more than 2,000 U. S. non- financial companies. That’s a staggering amount to be repaid.

The disconnect between cash and debt could mean companies could face rising defaults, a paradox even as the amount of corporate cash hits never- before- seen heights, the report says. “We believe corporate default rates could increase over the next few years,” according to the report.

Increasingly, the corporate landscape is becoming more of a situation of the haves vs. the have- nots, S& P Global says. Much of the cash is being held by an increasingly small cadre of mostly tech companies.

Separately, Moody’s said five U. S. tech companies — Apple, Microsoft, Alphabet, Cisco Systems and Oracle — hold a third of corporate cash and investments. The 25 most cash- rich companies with the highest credit ratings, called investment- grade issuers, are so flush they’re masking an erosion elsewhere, S& P Global Ratings says.

Meanwhile, companies with less cash are adding up debt and seeing their cash positions erode. Companies with the lowest credit ratings, called speculative- grade issuers, now only have 12 cents in cash for every $ 1 in debt. That’s down from 21 cents in 2010 and below the 15 cents in 2008 during the Great Recession. These speculative- grade companies saw their cash sink 4% in 2015.

The pace of borrowing is staggering and outpacing cash by a mile. Over the past five years, debt outstanding jumped 50 times faster than cash did, S& P Global says. “But credit risks are rising as the corporate credit cycle ages,” the report says.

Investors don’t seem too worried yet. The 10 companies in the Standard & Poor’s 500 with the lowest ratios of cash and investments to total debt are up an average of 9.6% this year, according to a USA TODAY analysis of data from S& P Global Market Intelligence separately from this report. That beats the S& P 500’ s 1.6% gain this year. Investors understand heavy debt loads aren’t necessarily a problem as long as the companies have the cash flow to service the interest payments and debt markets are open to refinancing in the future.

AFP/ GETTY IMAGES